Analysts at BCA Research argue that while these imbalances may not lead to a deep recession, they are substantial enough to produce a downturn.
One of the most glaring imbalances in the U.S. economy is found in the real estate sector, particularly commercial real estate (CRE).
Office vacancy rates have reached record highs following the COVID-19 pandemic. Prime office spaces are being sold for fractions of their former value, and CRE prices are showing the worst performance since the Global Financial Crisis (GFC), with prices down 8.9% year-over-year in Q1 2024.
Furthermore, regional banks, which are highly exposed to CRE, face increased vulnerability. Delinquency rates in this sector are rising, and another wave of bank failures could occur if CRE distress continues to worsen.
“The number of multi-family units under construction surpassed 1 million last August, more than double the level reached during the 2000s housing bubble,” the analysts said.
In residential real estate, a price imbalance has emerged. Real home prices are 22% above pre-pandemic levels, pushing home affordability to historical lows.
With fewer home purchases, homebuilders have reduced starts, further dragging down residential investment.
Residential investment typically contracts in the lead-up to a recession, and current data from the Atlanta Fed’s GDPNow model indicates a 8.5% annual decline in the third quarter.
Consumer behavior is another major imbalance in the economy. The personal savings rate has plummeted to just 2.9%, less than half of its 2019 level.
While personal outlays have grown by 5.3% over the past year, disposable income has only risen by 3.6%, forcing consumers to rely on savings.
However, the depletion of pandemic-era savings suggests that consumer spending will likely slow down in the coming months.
Moreover, income growth is set to decelerate further as wage growth slows and the labor market weakens. The average workweek is shrinking, which, combined with slowing compensation, is likely to exert downward pressure on earned income.
Rising delinquency rates on credit cards and auto loans, now at their highest since 2010, suggest that consumer borrowing cannot be relied on to sustain consumption.
Banks have responded by tightening lending standards, making it more difficult for consumers to rely on credit.
The manufacturing sector, too, is showing signs of strain. New orders in the manufacturing sector fell to 44.6 in August 2024, the lowest level since mid-2023, reflecting weak demand both domestically and abroad.
The overhang of consumer durable goods spending, which surged during the pandemic, continues to weigh on the sector.
Even though spending has moderated, it remains well above pre-pandemic levels, suggesting that demand for manufactured goods is unlikely to reaccelerate in the near term.
Global factors, such as China’s economic slowdown and Germany’s loss of competitiveness, also weigh on U.S. manufacturing.
China’s shrinking domestic demand has led to a surge in exports, contributing to global supply gluts, while Germany’s rising unit labor costs make it less competitive within the Eurozone.
Fiscal policy, which traditionally acts as a countercyclical tool during downturns, is constrained by an unprecedented budget deficit of 7% of GDP. This limits the government’s ability to implement stimulus measures during a recession.
In addition, state and local government spending, which has contributed significantly to GDP growth in recent years, is expected to decline in 2025. With fewer resources for fiscal intervention, the U.S. may find it difficult to counter the effects of an economic slowdown.
Equity markets, too, are showing signs of vulnerability. While a mild recession might not severely damage the broader economy, it could trigger a correction in stock prices.
The S&P 500 is currently trading at 20.8 times forward earnings, a 42% premium over fair value estimates.
If the U.S. does slip into a recession, equity markets could see a downturn similar to the 2001 recession when the S&P 500 fell 49% peak-to-trough, despite the mildness of the economic contraction.
Source: Economy - investing.com
